A bear market refers to a situation in the market where there is a sustained and significant decrease in prices. This term is commonly used to describe a scenario in which the prices of securities, including cryptocurrency assets decline by 20% or more from their recent peak levels. This decline is often accompanied by prevailing pessimism and a general sense of negative sentiment among investors.^[1][2]

Overview

The cryptocurrency market is characterised by its significant price fluctuations and the possibility of substantial profits, making it appealing to investors globally. Similar to the conventional stock market, cryptocurrencies also undergo periods of bullish and bearish market conditions.^[6]

Bear markets are characterized by a prolonged period during which the supply of assets exceeds demand, resulting in declining prices. This situation is often marked by low levels of investor confidence. Investors who hold a pessimistic outlook and anticipate further price drops are commonly referred to as "bears." ^[3]

Although the 20% decline is the established threshold, bear markets often extend well beyond that point over a prolonged duration. Despite intermittent "relief rallies," the overarching trajectory remains downward. This price decline often results in some crypto projects being wiped from the market for lack of funds and inability to meet both users and investors expectations. ^[5][10]

A defining feature of bear markets is the prevailing pessimism and diminished investor confidence. In this context, positive news often goes unnoticed as investors continue to sell, driving prices further down.^[5] Gradually, as stocks and digital assets become perceived as attractively priced, investors initiate buying activity, indicating the end of the bear market.^[2][8]

Navigating bear markets can be challenging, especially for novice traders who lack experience in such market conditions.^[3] Investors often opt to sell their investments and seek the security of cash or fixed-income securities, rather than actively participating in the market. The outcome indicates a market in favour of sellers.^[4]

Causes of Crypto Bear Market

Generally, events such as pandemics, political crises, slow economies, and wars may trigger the start of a bear market. However, there are three main causes of a crypto bear market: decreased investor confidence, high interest rates, and economic recession. ^[5][7]

A bear market frequently coincides with a larger economic recession, characterized by sluggish growth or an outright contraction of the economy. In response to such conditions, central banks often opt to increase interest rates, rendering speculative choices such as cryptocurrencies comparatively less appealing or even impractical. This prompts investors to find more reliable investments alternatives such as bonds. ^[7][9]

Characteristics of Bear Markets

A bear market in the crypto industry exhibits the following characteristics:

• Increased Volatility: Bear markets are characterized by increased price volatility compared to bull markets. Prices can experience sudden and unpredictable fluctuations, making trading and investing in cryptocurrencies more challenging.^[5][7]
• Sharp and Prolonged Price Decline: Typically, a crypto bear market witnesses a rapid initial price drop, followed by an extended period of continuous decline. This downward trend can persist for several months or even years.^[5][7]
• Negative Sentiment: Negative sentiment prevails during bear markets as investors become pessimistic about the market's future prospects. This negativity can exacerbate the price decline, as individuals may be more inclined to sell.^[6][7]
• Regulatory Attention: Governments and financial institutions may impose heightened regulations on the cryptocurrency space during bear markets. Increased regulatory scrutiny can create obstacles for investors and traders.^[7]
• Uncertainty: Bear markets often induce a sense of uncertainty among investors, leading to sell-offs and further price drops. This uncertainty can stem from concerns about the market's future and the overall economic environment.^[7]
• Reduced Trading Volumes: Trading volumes tend to decrease during bear markets due to reduced investor interest in buying or selling cryptocurrencies. Lower trading volumes can further contribute to price instability.^[6][7]

Phases of the Bear Market

In the context of traditional financial markets, bear markets are typically characterized by four distinct stages:

1. High Prices and Optimism: The first phase is marked by high asset prices and an optimistic sentiment among investors. During this period, many investors are actively participating in the market and realizing profits from their investments.
2. Market Deterioration: In the second phase, there is a noticeable decline in asset prices and trading activity. Company earnings also start to decrease, leading to a less favourable economic outlook. As the market mood turns negative, some investors begin to experience fear and anxiety, often leading to panic selling, a phenomenon known as capitulation.
3. Speculator Involvement: The third phase sees the entrance of speculators into the market. These speculators may be attracted by the lower prices, hoping for a potential rebound. As a result, there might be a temporary increase in both prices and trade volume.
4. Sustained Decline and Transition: The fourth and final phase of a bear market is characterized by a continued but slower decline in asset prices. Despite the ongoing decrease, positive news and optimistic sentiment gradually draw back investors who believe that the worst might be over. This renewed interest eventually sets the stage for the market to transition from a bear market to a bull market, where prices start to rise again.^[11]

It's important to note that while the traditional financial market's bear market phases provide a general framework, the dynamics of the cryptocurrency market may differ due to its unique nature and limited historical data. As the crypto market evolves, its own distinctive patterns and phases may emerge.

Investing During a Bear Market

Bear markets often attracts more risk in the crypto industry than traditional markets because prices are lower and investors have low to zero confidence in the market. However, some investors consider this as an opportunity to gain higher returns in the future. They do this by buying cryptocurrencies at lower prices during the bear market and selling them at the peak of the next bull market. ^[5][6]

Another strategy used by investors is to focus only on digital assets with strong fundamentals such as real-world use cases, an active community, and a solid development team. Projects like Bitcoin and Ethereum are good examples of such projects having survived multiple bear markets, yet maintaining their positions as the first and second largest crypto platforms. Such projects can withstand market fluctuations and recover when the market conditions improve. ^[5]

Predicting the duration of a bear market is inherently challenging, particularly when influenced by factors like economic recessions or comparable events. Consequently, there is a possibility of making untimely investment decisions by either buying prematurely or potentially overlooking promising investment opportunities.^[6]

---

Examples of Bear Market

The crypto space has experienced its fair share of bear markets. Some of the notable examples of crypto bear markets in history include the following:

2014/2015 bear market
The first large-scale crypto bear market followed an unexpected bull market in late 2013. First, an alleged market manipulation at Mt. Gox drove BTC prices from $200 to a record $1,236. ^[10]

The erratic gain between early November and December 2013 was swiftly followed by a rapid collapse as most market players sought profits in a low-liquidity market. Two years of crypto winter followed, with the global market valuation falling from $15 billion to $3.5 billion at its lowest in early 2015. The markets did not recover until mid-2015 and took an extra years to reach the previous all-time-high price.^[10]

Crypto Winter in 2018
Bitcoin and the crypto market had one of the steepest price falls after reaching an all-time high of about $20,000 in early 2018. Bitcoin's worldwide market value fell from $820 billion to just about $100 billion as it traded at $3,200 after a roughly 12-month decline. ^[10]

2022 Crypto Bear Market
The Covid-19 pandemic of 2020 shook the world economy also influenced the crypto market cycle. This pandemic, coupled with the entry of institutional investors into the crypto market, increased speculations and affected all markets. The crypto market collapse happened on May 12, 2021 when Bitcoin went from $60,000 to $30,000 within a few hours. However, this market collapse was reabsorbed in the following months, enabling Bitcoin to hit another peak in November 2021. The Terra-Luna ecosystem collapse in May 2022 started the 2022 crypto bear market. ^[12]